Peer-to-peer lending sites: MSE guide discussion

Nardge

Thanks Malthusian and Stehouk

Lendy and Funding Secure were known to be 'no no's' long before their collapse...

The same could not be said for Collateral

I'm with Lending Crowd, Zopa, Assetz Capital, Growth Street, Lending Works, Octopus Choice, Ratesetter, Kuflink, Loanpad, Proplend, Crowd Property, and CapitalRise.

I left Funding Circle when they became all secretive and began to lose reputation.

Ultimately I will reduce my investment from 4K to 3K in each (I've only 1K in CapitalRise).

Should any one of the above go down, I could just about tolerate a 3K loss.

With Kind Regards

masonic

So far so good, it looks as though there has been an orderly handover to the joint administrators, the platform website remains open (I suggest people download their records just in case) and hopefully this will be the orderly wind-down of the loan book (many of which were already in recovery) some of us were hoping for.

Who's next? MoneyThing?

itwasntme001

Not only are P2P loans generally going to be bad quality (why would borrowers have to resort to paying higher interest to P2P platforms when they could have gone to a bank and pay less?), but P2P as a whole is very similar to a ponzi scheme although by definition not quite.


Why is it close to a ponzi sceheme? Because the platform depends on loans being made (and remaining good) in order to pay for their ongoing costs. Initially you had high rates etc to draw people in. But as loans turned bad and rates lowered, fees reduced putting platforms at risk of solvency. It is not quite a ponzi scheme as platforms never promised anything and told you beforehand that loans can go bad. But it certainly feels like one.

itwasntme001

masonic wrote: »

Who's next? MoneyThing?

My moneys on (well not quite, but i have exited FC) funding circle.

itwasntme001

itwasntme001 wrote: »

Not only are P2P loans generally going to be bad quality (why would borrowers have to resort to paying higher interest to P2P platforms when they could have gone to a bank and pay less?), but P2P as a whole is very similar to a ponzi scheme although by definition not quite.


Why is it close to a ponzi sceheme? Because the platform depends on loans being made (and remaining good) in order to pay for their ongoing costs. Initially you had high rates etc to draw people in. But as loans turned bad and rates lowered, fees reduced putting platforms at risk of solvency. It is not quite a ponzi scheme as platforms never promised anything and told you beforehand that loans can go bad. But it certainly feels like one.

I guess you could argue that banks are the same, and you would be right. However banks are well regulated and capitalised and have proper risk management processes and controls in place. Also depositors (who are the bank's true lender's) have FSCS protections in place.

masonic

Another difference between banks and P2P firms is that P2P firms generally lack anyone with the qualifications or experience to run a lending business on this scale. At the outset anyone could set up a P2P platform, all they needed was a £100 consumer credit licence and a £30/year data protection licence. Two out of the three recent bust platforms entered the market in this way (the third decided to fraudulently impersonate an old consumer credit firm rather than apply for FCA authorisation as a new entrant to the market).

Where P2P really starts to resemble a ponzi scheme is where the platform has a secondary market and underwriters - those who hold the loans for a time before passing them on to another hapless investor before they get placed in default. Some platforms make things worse by allowing loans to be traded well past the date they start to become distressed. Couple that with the inherent conflict of interests that the platform's profitability is dependent on the volume of loans it can write and you end up with the situation we so often see, where in the early years everything looks rosy, but as the platform begins to get weighed down by a larger and larger volume of non-performing loans in which its customer base have their funds trapped, it is unable to write new loans at the same time as its costs increase due to the management of recalcitrant borrowers.

It's now very clear that P2P will never achieve the widespread adoption that would have led to the biggest players in the market generating the profits forecast in the early years. The FCA is even considering placing restrictions on the marketing and sale of P2P investments.

itwasntme001

Yes there is a point where a platform can be overwhelmed by non-performing loans as it take actual man hours to sort these out (no wonder some platforms look too lazy about this) and this only increases the more volume that has been transacted. This means hiring more staff which costs money.


For example for every person they hire, assuming they were on £30k pa and assuming they take in fees of 1% per loan, that means they need to originate £3m in loans just to cover the cost of that extra person. That is going to be difficult for the platforms lending to normal consumers as each loan is much smaller then say a property developer loan.


Also £30k is not a lot and i would question the calibre of some of the workers at these platforms. Why not work for a bank doing similar thing for £100k a year? Because the people working at the platforms are simply not good enough and the platforms can not afford to pay people £80-100k pa so they hire poor quality people on £30k pa. P2P does not have economies of scale like banks do, so they are bound to get into trouble as loan book grows (as they are forced to just to remain in business and as you said there is conflict of interest due to them originating any old loan just to get more loans done).

keyboardworrier

Funding Secure recently created new accounts based upon access to funds - it's a disgrace that they took peoples money for these new products when surely they must have known what was coming (Lendy also did the same thing before going into administration)

stehouk

keyboardworrier wrote: »

Funding Secure recently created new accounts based upon access to funds - it's a disgrace that they took peoples money for these new products when surely they must have known what was coming (Lendy also did the same thing before going into administration)

I worked in sales when i was younger and we used to be suspicious when a company dramatically increased orders for no apparent reason, they were stock piling prior to going bankrupt. seems the p2p are doing the same only with unsuspecting investors money,

jamesd

masonic wrote: »

Some platforms make things worse by allowing loans to be traded well past the date they start to become distressed.

Being able to trade distressed and defaulted loans is desirable, not undesirable. One easy case can be ISA to non-ISA sales where one doesn't get tax relief and the other does. Someone who can't use the relief because interest is within the PSA is similar.

In other cases people can just have different opinions about a loan's prospects, want to simplify their tax reporting or want less hassle.

Where trading in impaired loans can be inappropriate can be when a platform doesn't disclose state information, making it impractical to decide a value. The Moneything Birkenhead loans were an extreme example of this because they didn't even disclose that the borrower had defaulted by overspending on the first and second tranches when offering the third.